The Federal Reserve System controls the flow of money in and out of banks by raising or lowering its requirements for bank reserves and buying and selling federal securities. It lends money to banks at low interest rates (the “discount rate”) to help banks meet their short-term liquidity needs, and is known as the “lender of last resort” for banks experiencing liquidity crises. Together, the FDIC and the Federal Reserve form the federal safety net that protects depositors when banks fail.
Membership in the Federal Reserve System is required for national banks, optional for state banks. While many large state banks have become Fed members, most state banks have chosen not to join. The Federal Reserve is the federal regulator of the 976 state-chartered member banks, and cooperates with state bank regulators to supervise these institutions.
The Federal Reserve also regulates all bank holding companies. Its regulatory focus is not so much on the banks within a holding company as on the umbrella structure of the holding company itself. Holding companies must apply to the Federal Reserve to acquire new subsidiaries or engage in new activities. The Fed monitors the capital condition and general financial health of holding companies, and may take enforcement actions against them. The Federal Reserve is also responsible for federal oversight of state-chartered and -licensed offices of foreign banks in the United States.